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Faced with a dismal allocation in the annual budget, the defence ministry is looking to unlock a virtual treasure chest of funds lying unused in public sector units (PSUs). An internal study has revealed that outstanding advances to these enterprises — money usually given towards the end of the financial year from the capital budget — have swollen to $8.3 billion over the years.

In a new set of instructions sent across last week, financial managers have been asked to review the very system of providing advance payments to the public sector. ET has learnt that the ministry is concerned that PSUs have been using the interest generated from advance payments to show profits, instead of generating revenues from their core area of expertise.

“Provision of advance shall not be a profit-making proposition for PSUs. Either they shall be subjected to provide interest on advance drawn or interest bearing financial instruments be obtained as a guarantee against the advance given,” a letter sent to all financial managers in the ministry reads. According to the internal audit, while the total amount outstanding from PSUs is Rs 55,892 crore ($8.3 billion), most of it is (Rs 51,573 crore) with Hindustan Aeronautics Limited. These are advance payments made since as early as 1975 which have still not been accounted for, the audit reveals.

The ministry has also red-flagged the practice of parking funds in PSUs as advance payments towards the end of the budget year as capital funds remained unspent over the years. “PSUs shall raise funds under the provisions of Companies Act and directives issued by Sebi rather than be used as ideal place for parking of government funds released under budgetary system,” the note sent to all PSUs reads.

As a first step, instructions have been passed to clear the outstanding funds till the year 2000. Also, a new provision will be put in place for “levy of penal interest if the advances extended to PSUs are not utilised within the given period for the purpose for which it has been released”, it pointed out. Faced with a grim realisation that the Defence budget will remain limited over the next few years with no major increase planned, Defence Minister Manohar Parrikar has been trying to streamline spending, cutting down on wasteful expenses and pruning the cost of acquisition.

In the last financial year, the ministry unlocked a corpus of $2.3 billion that was lying as advance payments made into Indian accounts in the US for purchase of equipment under the foreign military sales pact.